Climate Change, Renewable Resources and Economics

By: Frank_Hollenbeck

Many socialists have conveniently repackaged themselves as environmentalists and latched onto climate change as a convenient means to preach the standard socialist agenda of planning and control.

These socialists will talk about glaciers retreating and the need to force farmers in Normandy, for example, to stop running their tractors on Tuesday. Anyone who questions the basic precepts of climate change are instantly viewed as ignoramuses who deny the overwhelming scientific evidence that climate change exists.

Yet, what we have learned from economics is that these claims about climate change cannot scientifically be made. It is beyond man’s scientific abilities to do so, just like it is impossible for economists to draw conclusion of causality from empirical data. Empiricism can support a theoretical argument in economics but empiricism can never prove or disprove an economic theory.

In the past, economists were the intellectual roadblock to popular misconceptions, bad ideas, or more importantly, government policies sold to the public on false assumptions. But today, few economists challenge many of the environmentalists’ essential precepts about climate change or discuss the logic behind the environmentalists’ positions on renewable resources. Too many economists nowadays have sold themselves to the enemy, and have relinquished any role as defenders of common sense or rational thought.

So what does economics have to say about the environmentalists’ essential position that carbon emissions leads to climate change?

Over 100 years ago, the limits of empiricism in economics were made crystal clear. In the article, “The Elasticity of the Demand for Wheat”, R.A Lehfeldt (1914) attempted to determine the elasticity of demand by looking at the historical data of the price of wheat against the consumption of wheat. He attempted to correct for changes in other factors (ceteris paribus) and he found the elasticity of the demand for wheat to be a positive 0.6.

Should we conclude from this study that the demand curve for wheat is, in reality, upward sloping?  Hasn’t this empirical study showed that economic theory is wrong?

Any sensible economist would explain that what is observed are not points on a stable demand curve, but ever-changing intersection points between demand and supply or points moving toward equilibrium. A demand curve is like a photograph: It is only valid for that instance since other factors change constantly so that the position of the curves are different from one instance to the next. It is impossible to empirically measure the slope of a demand curve.

So what is the economist to do? He goes back to theory, realizing that empiricism is to help theory but not to be confused with the foundation or replacement of economic theory. Many economists (some with Nobel prizes) take too much liberty in throwing up an empirical relationship between two variables and implicitly assume a causal relationship. This type of economic analysis is a serious disservice to the profession.

Since we do not have a laboratory to conduct economic experiments, it is difficult for the economist to distinguish between association and causation or correctly determine the direction of causation.

The same logic applies to climate change proponents. The world is extremely complex and ever-changing. It is impossible for the environmentalist to make the claim of causation that carbon emissions lead to global warming, or the latest buzzword, climate change. Environmentalists face the same limits as economists- the inability to run a laboratory test. Hence, it is inadmissible to limit freedoms or liberties on something that will always remain nothing more than a possible hypothesis.

Another pet peeve of the environmentalist is renewable resources. According to many leading environmentalists, the government should spend taxpayers’ dollars to subsidize the development and research of renewable resources. Some universities have even created economic professorships in renewable resources economics.

This whole discussion on renewable resources is mostly unnecessary, and is, in reality, subterfuge to push the climate change agenda.

Take oil, for example. We currently have an abundance of oil available. Many oil companies have discovered large oil deposits but have determined it is not economically viable to develop these fields. They have determined that it is not worth using the two non-abundant renewable resources, capital and labor, to develop these fields. If labor and capital were free goods, then this oil would already have been extracted from the soil. What limits the extraction of oil is the scarcity of these two renewable resources, capital and labor, and not the availability of oil. So why should we be concerned about a resource we have too much of?  Why should we be concerned about an overly abundant resource?  The Institute of Energy Resources estimates that the US has over 400 years of recoverable oil. The words renewable or nonrenewable in front of the word resources are meaningless words used to push a socialist agenda.

Environmentalists will say we need to develop these renewable resources because one day we will run out of non-renewable resources. President Carter in 1980 declared that oil would be scarce by the year 2000 and President Obama used this logic to justify spending $100 billion of taxpayers’ dollars on renewable resources, such as Solyndra. Environmentalists obviously believe they are, like most statists, in the best position to predict the future. This argument is without any real substance. The reason we use oil today is because it is the cheapest form of energy. If it wasn’t, we would be using something else. As we run out of oil, prices will rise, inducing substitution and the development of alternatives.

Yet, we do not need the government to induce such changes or take our tax dollars to implement policies that allocate resources sub-optimally.  The cost of wind turbines has dropped 30% in the last five years. Solar panels are becoming cheaper and more efficient, reminiscent of advances in microchips technology.  One day, these may be the cheapest form of energy, and the markets will determine when that occurs. Let the market decide how resources should be allocated to best meets consumers most urgent needs. Subsidies and tax advantages (to both renewable and non renewable resources) are unnecessary and distortive.

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck's article archives.

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